A new report links the impact of expensive lending deals, mostly focused on Memphis’ minorities, to the widening of the city’s racial wealth gap.
A report from Institute for the Politics of Hope and Black Clergy Collaborative of Memphis While these loans (which include payday loans) are marketed as a “quick financial fix,” they are often designed as “debt traps.” This is attributed to triple digit interest rates on the loans and repayment mechanisms that can cause people to go into debt before taking out the loan.
“The more things change, the more they stay the same,” said Rev. Darell Harrington, chair of the Black Clergy Collaborative Economic Empowerment and senior pastor of the New Sardis Baptist Church. “This is basically economic slavery. Any time a person borrows a small amount, $400 or $500, and over time gets into a situation where they have to pay back thousands and thousands of dollars, that’s a real trap.”
According to the report, there are 114 high-rate lending businesses in Memphis, most of which are concentrated in densely populated Black and Latino neighborhoods in north and south Memphis.
Here are three takeaways from the Hope and Black Clergy Collaborative report on expensive credit and the impact it is having on minority communities in Memphis.
Where are the storefronts for bad credit in Memphis?
Of the 114 high-cost loan deals in Memphis, 71 are concentrated in six Memphis ZIP codes, all in densely populated minority areas.
The 38116 zip code, mostly Whitehaven, has the most storefronts at 15, according to the report. The 38115, Hickory Hill ZIP code is second on the list at 12.
Four zip codes have 11 expensive credit stores in Memphis (38111, 38122, 38128, and 38118), respectively in Orange Mound, Jackson/Berclair, Egypt/Raleigh, and Oakhaven.
“These patterns are enabled and reinforced by longstanding racial segregation and exclusionary lending practices such as redlining, predatory mortgage lending and restrictive covenants,” the report says.
The 114 expensive loan stores are more than twice the number of McDonald’s and Starbucks combined in Memphis.
Of the 114 storefronts, 74 are owned by out-of-state lenders, with 52 (45%) of them owned by two companies. Texas-based Populus Financial Group, Inc./Ace Cash Express owns 29 storefronts and Georgia-based TitleMax/TMX Financing owns 23.
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Impact of Expensive Credit on the Racial Wealth Gap in Memphis
In Memphis, the report found that 60% of Latino households and 50% of black households are cash poor, compared to 20% of white households. Liquidity poverty measures whether someone has sufficient financial cushions to meet basic needs for at least three months after an unexpected loss of income.
The report finds that “expensive credit, through its fee income and economic impact,” perpetuates this wealth gap.
About 15% of white households in Memphis are considered unbanked or unbanked, meaning someone has a bank account but uses other financial services like payday loans or money orders. This compares to 45% of Black households in Memphis and more than 50% of Latino households that are classified as unbanked or underbanked.
High-priced loans can lead to an increased likelihood of overdraft fees, delinquency on other bills, involuntary bank account closures, and bankruptcy. For example, payday loans can result in an APR of up to 460% on a loan that is fully due in 14 days, as permitted by state law.
This could lead the borrower into a cycle of re-lending if the loan is not repaid on time. The typical borrower is usually in 10 payday loans per year. More than 75% of all payday loan fees are generated by borrowers with 10 or more payday loans per year, according to Consumer Financial Protection Bureau data cited in the report.
Solutions to address expensive loans in Memphis
Last fall, the Black Clergy Collaborative launched an initiative with Hope Credit Union that connects people with financial products to help borrowers save and potentially avoid falling into a cycle of debt.
Once referred by Hope from a participating church, a person can receive a small loan of up to $1,000. The person has immediate access to half of the loan, while the other half goes into a savings account to collect interest.
After the borrower has repaid half of the loan at an interest rate of between 6% and 18%, the amount saved plus the interest accrued becomes availableaccording to a September commercial appeal comment explaining the program.
Harrington said they have worked with about 30 families since the program began.
“We want individuals to understand that there is hope, that there is a better way to manage and maintain a good financial picture even when going through difficult times,” he said.
At the local level, Memphis and Shelby County passed a joint ordinance in 2009 banning the construction of new storefronts for expensive loans within 1,000 feet of people’s homes. In 2020, the Memphis City Council passed a resolution calling on the Tennessee General Assembly to abolish payday loan deals. The city has no authority to enact this change at the local level.
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This decision was taken after coverage by The Commercial Appeal in February 2020 showed it Memphis, Light, Gas & Water raised $22 million from more than 133,000 payments made at 30 ACE Cash Express locations over Shelby County.
The Black Clergy Collaborative and the Hope Policy Institute are calling on state and state lawmakers to reverse some aspects of expensive loans. One proposal is to cap interest rates at 36% or less, a protection that is available at the federal level for active duty military personnel and 18 states, as well as Washington, DC Arkansas, is one of the 18 states that cap interest rates at 17%, per the report.
Omer Yusuf reports on the Ford project in Haywood County, residential real estate, tourism and banking for The Commercial Appeal. He can be reached via email Omer.Yusuf@commercialappeal.com or follow us on Twitter @OmerAYusuf.